Life annuity in Switzerland: is it worthwhile?

A life annuity gives you an income for the rest of your life in the form of a pension. It is an insurance policy on your capital that is paid out on a reliable basis as guaranteed income for the rest of your life or another specified period. A life annuity can help you to supplement your pension benefits from pillars 1 and 2.

The principle of a life annuity is simple. You build up capital with a provider by paying a one-off amount or regular contributions. You then claim these benefits after an agreed savings phase. Depending on the contract, the life annuity will be paid out for a certain period or for the rest of your life. The amount you receive depends on the provider, your age, the assets you have paid in and the benefits you wish to claim.

Amount of the life annuity

You can usually agree on the initial payout date individually with your provider. You can choose between monthly, quarterly, semi-annual or even annual payments. The amount paid out depends primarily on the benefits set out in the contract. Consequently, a life annuity is not an investment geared towards growth.

In addition to your guaranteed pension entitlement, you will receive a proportion of the surpluses generated by your provider each year. The amount will depend on your provider’s management skills and on capital market trends.

Tax liability

At first glance, life annuities appear to offer tax advantages: unlike an OASI or pension fund pension, you only pay tax on 40 percent of the life annuity as income (as at 2024). Your personal tax rate depends on your overall financial situation. However, you usually pay less tax in old age than you did when you were working. You only pay tax on the income generated by the annuity, while the portion of your capital that is gradually consumed remains free of tax.

However, the tax rate of 40 percent will be recalculated from 2025 onwards following a change in the law. The tax rate will then be based on the yields of Swiss government bonds. This should make life annuities more attractive from a tax perspective. Under the regulations still in force, the level of expected returns was set too high from today’s perspective.

But since you have already paid tax once when you paid the capital into the annuity policy, it is important to look at the details of this pension option: it is possible that your life annuity will ultimately be lower than the taxed pension you would receive from an equivalent pension fund balance. This is partly due to taxes and partly to the conversion rates of pension funds for pillar 2, which are sometimes higher than for life annuities.

There are two types of life annuities: immediate annuity and deferred annuity. The difference concerns the payout date. Both are based on the same principle: you either pay in a one-off amount or you build up capital by making regular payments. The capital is then transformed into an annuity.

Immediate annuity

With an immediate annuity, the capital you have invested is converted into a lifelong annuity that you start drawing immediately. This provides you with a guaranteed additional source of income that you can count on, regardless of the performance of securities or other financial uncertainties.

Deferred annuity

With a deferred annuity, the capital you have paid in is converted into an annuity that you can start drawing whenever you like. You can decide for yourself when you want to receive the first payment.

Life annuities have a number of advantages due to the fixed contractual agreement: when receiving an annuity, you don’t have to worry about asset management. You avoid having to pay fees for a custody account. And you can sign additional agreements to make changes to the annuity. For example, a reimbursement agreement or an annuity guarantee will ensure that agreed amounts will be paid to a beneficiary on your death.

However, all these additional agreements come at the expense of returns. As an insurance policy, a life annuity is a retirement income option that is particularly suitable for healthy people who can be fairly sure that they will live to a very old age. As a rule, the policy only pays out more than you actually paid in after many years of drawing a pension. Gradual capital consumption doesn’t begin for a long time, and only then do you benefit from the interest on your assets.

If you are interested in a life annuity as a source of additional income in retirement, you should weigh up the pros and cons carefully and compare other options, depending on your financial situation. A life annuity is basically an insurance policy with corresponding costs, but not an investment to build up assets. One argument in favor of life annuities is that they generate a lifelong pension, which offers security and protects you if you live for a long time.